TRENDS IN PUBLIC REIT M&A: 2012-2017 12 Our review included findings and commentary on the following: 1. Form of Consideration 2. Premiums 3. Structure and Other Tax Considerations 4. Treatment of Dividends 5. Deal Protection Provisions 6. Go-Shops and Window Shops 7. Conditions to Closing 8. Termination Fees; Expenses 9. Remedies 10. Post-Signing Litigation 1. FORM OF CONSIDERATION One of the first questions in every M&A transaction is the amount and form of the consideration to be paid to the common shareholders of the target. Of the REIT transactions announced in the 2012-2017 period, 20 (37.0%) were all-cash, 21 (38.9%) were all-stock and 13 (24.0%) were mixed cash-and-stock1 . This means that approximately 65% of the time, buyers used public stock as acquisition currency, in whole or part. To be sure, the form of agreed consideration is typically heavily influenced by market conditions. For example, in the 2005–2007 time frame, low interest rates and availability of cheap debt drove a take-private boom characterized by highly-leveraged buyers making all-cash offers. Many publicly-traded REITs during that period believed that they were effectively priced out of the M&A market due to their unwillingness to incur higher leverage ratios to finance all-cash acquisitions at prevailing prices. Conversely, the past seven years have witnessed a shift to more strategic deals involving public REITs as more active participants on the buy-side. This trend has been compounded by the perceived discount to NAV at which many public REITs have traded during much of the 2012-2017 period. An uptick in cash deals is likely to be accompanied by a reversion of public REIT prices to their historic means at or near NAV. The chart below illustrates the number of cash deals vs. those with all or some stock announced during the surveyed period. Although the winds have generally shifted in favor of strategic deals — for example, 2016 saw 14 announced public REIT transactions and all but one of them had a stock component — the significant overall percentage of recent deals involving a mix of stock and cash (as above, 13 of 34 or approximately 38.2% of all deals with a stock component) signal that sellers remain interested in taking at least some money off the table to monetize their investments in the event of a sale. Including a cash component can benefit buyers as well in the form of reduced dilution. The vast majority of transactions over the survey period provided for a “fixed basket” of consideration to target shareholders, whether stock, cash or a combination of both. The amount and form of consideration was determined when the merger agreement was signed and neither could be altered after that point. The “fixed basket” approach provides certainty to all parties on what consideration will be paid, but does not provide flexibility to address post-signing developments or account for differences in what individual shareholders want. A minority of transactions, however, did vary from the “fixed basket” format: • Four of the mixed stock and cash transactions were cash/stock election deals that permitted each target shareholder to elect whether to receive cash, stock or a combination thereof, subject in each case to an aggregate limit on cash consideration (e.g., up to 20% 1 Mixed cash stock deals include those in which each shareholder receives a fixed bundle of cash and stock as well as cash/stock election deals in which individual shareholders can elect, subject to certain overall limits, whether to receive cash or stock or a mix thereof. Number of Deals by Form of Consideration 14 12 10 8 6 4 2 0 2012 2013 2014 2015 2016 2017 All Cash All or Some Stock